A look ahead with Fred
By Clint Engel -- Furniture Today, March 8, 2010
HIGH POINT —
Six years ago, Fred Schuermann, the retired former CEO of Ladd Furniture, warned the furniture industry of a painful slowdown coming in about five years.
All domestic case goods manufacturing would be gone, thanks to low-cost Chinese imports, he said.
Fabric production would be next, followed by upholstery cut-and-sew functions. Baby Boomers would be aging out of the furniture buying market in droves and were not going to be replaced fast enough by the following generations.
“We've got Death Valley coming up,” Schuermann told members of the Furniture Manufacturers Credit Assn. at their September 2003 annual meeting in Myrtle Beach, S.C.
“The problem is somewhere out there — about 2009 and that's my estimate — this thing starts to turn down.”
While it didn't come to pass exactly as Schuermann laid out for the industry group, the industry pain did indeed show up, and even a little sooner than he expected.
Furniture/Today caught up with Schuermann late last year and dared to asked him for a new forecast and his pick for the Super Bowl. He wasn't talking football, but Schuermann had plenty to say about the furniture industry, and unfortunately, his predictions were still pretty dire.
“Because of the demographic turndown and the financial downturn, everybody's receivables are down. Their inventories are down,” he said. “Cash flows are good. Everyone has been paying off debt and they're surviving by liquidation. In essence, you've got a slow-motion, going-out-of-business sale. Cash flow is always good when you've got a going-out-of-business sale.”
Schuermann said the downturn at retail has been bad during this recession, but that the industry may not have seen the worst.
“The real bullet is going to come when business starts to pick up, because they're going to be real capital-constrained,” he said. “The banks aren't loaning money to the furniture industry.… If you own three retail stores and all of sudden you have to buy more product, what are you going to do? I think the worst shakeout is going to be when business gets better.”
Schuermann also thinks the housing problems of the past few years are at least another four or five years from working themselves out. Why?
“You've got a huge shadow inventory out there,” he said. That includes foreclosed properties that banks are reluctant to put on the market until prices stabilize and increase. Home-owners also are holding back properties from sale, waiting for prices to rise.
He said the key to understanding this is to look at new home construction, which has been decreasing, not home resales — which have seen a pick- up, but only because much of it is from distress selling and foreclosure sales.
“I think we've got another four or five years of really wicked housing numbers,” he said.
High unemployment is another problem Schuermann believes will be around for a while. The U.S. rate is 10% and he thinks it will peak at about 10.7%, but “we might be headed toward where Europe is — where 8% unemployment is GOOD.”
The financial crisis, he said, has merely clouded the big issue for the industry that he saw coming back in 2003 — the turmoil from a massive demographic shift. The 76 million Baby Boomers are aging out of the market. They're not buying furniture at the same rate they used to.
The Generation Xers are a much smaller group “and they ain't got no money,” he said. The so-called Eco-boomer generation following is big (more than 70 million) but they won't be in buying mode until the 2030s, he said.
“I think we're in for a period of going the way of Europe — higher unemployment, higher taxes, less growth. That's sort of where we're headed. The growth is going to be in Asia.”
Schuermann said he remains bullish on America in general, but said the upturn for the country is a long way off. That's partly because of the lack of lending to small business, where he sees little improvement, and because “right now, we've got a government that's anti-small business.”
“But you get out there — 2016 somewhere, when I'm in a nursing home and Generation X is coming through — and things will turn. But the next five years are going to be grinding, tough years,” he said.
In the meantime, the industry needs to focus on margins. Schuermann sits on the board of Atlanta-based retailer Havertys, one of the few stocks he owns these days, and he said that the Top 100 company has managed to increase its gross margins in recent years from about 46% to about 52%, which has been a savior in the current economic climate.
He also believes that as the tough years wear on, the industry will move away from competing on price “because everyone is going to be the low price.”
“A brand will start to mean something,” said Schuermann, “if a company has the quality and service to go with it.”
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